Nobody knows for sure what will happen in the midterm elections. But if Republicans take one or both houses of Congress, the most important question will be one that is getting hardly any public attention: What will the Biden administration do when the GOP threatens to blow up the world economy by refusing to raise the debt limit?
In particular, will Democrats be prepared to take the extraordinary actions the situation will demand, doing whatever it takes to avoid being blackmailed?
Notice that I said “when,” not “if.” After Republicans took the House in 2010, they quickly weaponized the debt limit against the Obama administration, using it to extract spending cuts they couldn’t have achieved through normal legislative means. And that was a pre-MAGA GOP, one that for the most part didn’t deny the legitimacy of the president and didn’t make excuses for violent insurrections.
In fact, I wonder whether Republicans will even seriously try to extract concessions this time around, as opposed to creating chaos for its own sake.
Notice also that I said “blow up the world economy,” not merely hamstring the U.S. government. For the consequences of forcing a federal debt default, which is what refusing to raise the limit would do, would extend far beyond the operations of the federal government itself.
Let’s back up and talk about why any of this is an issue. U.S. law, for historical reasons, requires in effect that Congress vote on the budget twice. First, senators and representatives enact legislation that sets tax rates and authorizes spending. This legislation ends up determining the federal budget balance. But if we end up running a deficit, Congress must vote a second time, to authorize borrowing to cover that deficit.
It’s not clear that this procedure ever made sense. In any case, in modern times the debt limit empowers cowardly posturing: Politicians can claim to be for fiscal responsibility, refusing to vote for a higher debt limit, without specifying how the budget should be balanced.
And no, “We should eliminate wasteful spending” isn’t an honest answer. The federal government is basically a giant insurance company with an army: Spending is dominated by Social Security, Medicare, Medicaid and the military, and voters want to maintain all of these programs. There’s surely waste in the government, as there is in any large organization, but even if we could somehow make that waste disappear, it wouldn’t do much to reduce the deficit.
Someone seriously worried about the deficit could call for higher taxes. After all, the U.S. tax burden is low compared with other wealthy countries. But Republicans aren’t going to go there.
Where will they go? There’s lots of evidence that Republicans will, if they can, try to use the debt limit to extort major cuts in Social Security and Medicare. They probably couldn’t pass such cuts — which would be deeply unpopular — through the normal legislative process, and they certainly wouldn’t have enough votes to override a Biden veto. But the idea would be to force Democrats into complicity, so that the public doesn’t realize who’s responsible for the pain.
And that’s a best-case scenario. As I said, the GOP is far more radical now than it was more than a decade ago, and it might well be less interested in achieving policy goals than in blowing up the world economy on a Democratic president’s watch.
Why would refusing to raise the debt limit blow up the economy? In the modern world, U.S. debt plays a crucial role: It is the ultimate safe asset, easily converted into cash, and there are no good alternatives. If investors lose confidence that the U.S. government will honor its obligations, the resulting financial storm will make the recent chaos in Britain look like a passing shower.
So what should be done to avert this threat? If Republicans do gain control of one or both houses in November, Democrats should use the lame-duck session to enact a very large rise in the debt limit, enough to put the issue on ice for years. Republicans and pundits who don’t understand the stakes would furiously attack this move, but it would be far better than enabling extortion — and would probably be forgotten by the time of the 2024 election.
If, for some reason, Democrats don’t take this obvious step, the Biden administration should be prepared to turn to legal strategies for bypassing the debt limit. There appear to be several loopholes the administration could exploit — minting trillion-dollar platinum coins is the most famous, but there are others, such as issuing bonds with no maturity date and hence no face value.
The Obama administration was unwilling to go any of these routes, largely, I think, because it believed that they would look gimmicky and undignified, and it preferred to seek compromise. But surely Democrats don’t need to worry about dignity when the other party is ruled by Donald Trump. And in any case, they’re now confronting opponents who aren’t just radical but also anti-democracy; no real compromise is possible.
Of course, none of this will be relevant if Democrats hold Congress. But they should prepare for the worst.
Paul Krugman, winner of the Nobel Memorial Prize for Economic Science, is a columnist for The New York Times.